China's May industrial profits slump again despite easing COVID curbs

2/2 © Reuters. FILE PHOTO: A coal-burning power plant can be seen behind a factory in the city of Baotou, in China's Inner Mongolia Autonomous Region October 31, 2010. REUTERS/David Gray 2/2

BEIJING (Reuters) -Profits at China's industrial firms shrank at a slower pace in May following a sharp fall in April, as activity in major manufacturing hubs resumed, but COVID-19 restrictions still weighed on factory production and squeezed factory margins.

Profits fell 6.5% from a year earlier, less than the 8.5% decline in April, according to data released by the National Bureau of Statistics (NBS) on Monday.

May's improvement was driven by surging profits in the coal mining and oil and gas extraction sectors, as the Russia-Ukraine war sparked a rally in global commodity prices.

However, profits in the manufacturing sector dropped 18.5% in May as equipment manufacturing improved significantly, Zhu Hong, senior NBS statistician, said in a statement. April profits were down a sharper 22.4%.

"Overall, the performance of industrial firms has shown some positive changes, but it should be noted that the year-on-year growth of industrial profits continued to fall, with rising cost pressure and difficulties in production and operation," Zhu said, adding that the foundation for recovery was not firm.

With production gradually improving from last month, the profit declines of industrial firms in COVID-hit Shanghai, eastern province of Jiangsu and northeastern provinces of Jilin and Liaoning all narrowed by more than 20 percentage points, Zhu said.

The gap between profit margins of upstream and downstream sectors narrowed in May, analysts at Goldman Sachs (NYSE:GS) said in a note, adding the divergence of profits across various sectors and firms remained significant.

Some factories restarted operations in cities such as Shanghai following lockdowns but the weak property market and fears of any recurring waves of infections have cast a shadow over factory production and raised doubts over the flagging recovery in the world's second-largest economy.

Industrial firms' profits grew 1.0% year-on-year to 3.44 trillion yuan ($514 billion) in January-May, slowing from the 3.5% increase in the first four months, the NBS data showed.

Profits at auto manufacturing firms shrank 37.5% in the first five months, while that for the ferrous metal smelting sector dived 64.2%.

Over the same five-month period, industrial firms' revenues grew 9.1% to 53.16 trillion yuan, slowing from 9.7% growth in the first four months.

China's economy showed signs of recovery in May after slumping the previous month as industrial production revived, but consumption remained weak and underlined the challenge for policymakers amid the persistent drag from strict COVID-19 curbs.

Despite the uptick in overall industrial output, China's factory-gate inflation cooled to its slowest pace in 14 months in May, depressed by weak demand for steel, aluminium and other key industrial commodities.

With the domestic COVID situation improving and oil prices unlikely to rise significantly, Zheng Houcheng, director of the Yingda Securities Research Institute, expects industrial profit growth to be better in June despite cost pressures on firms.

China's cabinet in May announced a slew of measures covering fiscal, financial, investment and industrial policies to wrestle with the COVID-induced damage to its economy.

The policies underscore the government's determination to prop-up its economy, but analysts say a 5.5% target for growth will be hard to achieve if China sticks with its costly zero-COVID containment strategy.

The country vowed this month to ramp up support for the economy and roll out more policy steps but said it would refrain from issuing excessive money.

Liabilities at industrial firms rose 10.5% from a year earlier at end-May, compared with 10.4% growth as of end-April.

The industrial profit data covers large firms with annual revenues of over 20 million yuan from their main operations.

($1 = 6.6922 Chinese yuan)